The UK Competition and Markets Authority (CMA) recently published for consultation a series of proposals to improve its Phase II merger investigation process. This follows an earlier Call for Information in which the CMA sought feedback from interested parties from the business, legal, and economics fields.

Since the CMA was established in 2014, the Phase II process has remained relatively unchanged. However, significant developments since then have mandated a “stocktake.”

First, following the United Kingdom’s exit from the European Union, the CMA’s caseload increased. It is now reviewing a higher number of transactions, including in parallel with other authorities such as the European Commission where previously the latter would have had exclusive jurisdiction. This has led to the CMA becoming a more prominent global enforcer with a string of recent decisions which have attracted criticism from businesses.

Second, the nature of competition investigations has shifted in the past decade with additional emphasis being placed on the gathering of internal documents and data from merging businesses. The CMA also now conducts a greater amount of outreach to third parties. From our experience, the burden on merging parties, the CMA, and third-party observers has increased significantly over the past decade.

In an interview announcing the changes, Chief Executive of the CMA Sarah Cardell stressed that the CMA does not intend to “shy away” from taking “robust” decisions but that the CMA recognises this is an opportunity to make improvements to the agility, transparency, and efficiency of the process.

The CMA also plans to revise its “de minimis” guidance allowing it to deprioritise investigations into mergers where the total market is worth less than £30 million ($38 million), up from £15 million.

Overall, the proposed changes are likely to overcome key criticisms levelled against the Phase II process in the past, including that the process was unduly rigid and that decisions were often made without allowing parties sufficient time to address concerns.

KEY PROPOSED CHANGES

Phase II investigations are reserved for the most complex merger cases where the CMA has reached a decision in Phase I that there is a realistic prospect of a substantial lessening of competition. The determination of a Phase II investigation is made by an independent Inquiry Group made up of four members of the CMA Panel drawn from the legal, economics, and business field. Phase II investigations last up to 24 weeks (or 36 weeks where remedies are put forward) and may in some cases be even longer.

Currently, key milestones in the Phase II investigation include an initial investigation phase of 6 weeks, which culminates in the CMA issuing an Issues Statement setting out its key theories of harm. Following this, there is a further eight-week assessment period where parties are invited to attend a Main Party Hearing to assist the Inquiry Group in fact-finding culminating in the CMA issuing its Provisional Findings around the 15-week mark. Parties and third parties then have an opportunity to respond and engage with potential remedies before a final decision is reached by the end of the statutory 24-week period.

The current system has been criticised on a number of fronts. Primary among the concerns is that the Inquiry Group’s proposed theories of harm are not articulated early enough, and that Provisional Findings come too late in the day and after the main opportunities for parties to make oral representations have passed. Indeed, after provisional findings have been issued, merging parties often become frustrated at the “black box” decision-making and it is rare that a final decision differs from these provisional findings.

The process has also been criticised as being unnecessarily rigid and designed around key milestones limiting the ability of parties to discuss remedies at an early stage on a more informal, without-prejudice basis.

Increased Engagement Between the CMA and Merger Parties

• Phase I Decision as the Starting Point: The CMA proposes to do away with the Issues Statement and use the CMA’s Phase I decision as the starting point. Merging parties and interested parties will be invited to provide comments on the same. While the Inquiry Group will still retain discretion as to which theories it investigates, this will allow merging parties to frontload a significant amount of work as soon as the Phase I decision is published.
• More Opportunities for Direct Engagement: The CMA proposes to introduce an “initial substantive meeting” earlier on in the process shortly after the parties provide a response to the Phase I decision. The CMA also proposes to formalise the process of holding an initial “teach-in” (including a site visit in certain cases) to focus on explaining how the businesses work.
• Frequent Updates: There is proposed to be an increased use of update calls throughout the investigation to give merger parties greater visibility on the CMA’s process to enable improved focus on key areas.
• Direct Exchange of Expert Views: The CMA will provide opportunities for the merger parties’ economics advisers to engage with the CMA’s experts, in particular in relation to complex or novel theories of harm.

Unpicking the ‘Black Box’: Earlier Interim Report and Redesigned Main Party Hearing

OTHER REFORMS

The consultation paper also outlines other changes that reflect the CMA’s practice (across both Phase I and Phase II), recent judgments of the Competition Appeal Tribunal (CAT) and certain legislative changes, including the introduction of the new special energy network merger regime by the Energy Act 2023. There will also be changes to certain standard documents, such as the template Merger Notice, the form which parties use to notify the CMA of a merger, and the Confidentiality Waiver, which allows the CMA to exchange confidential information without other authorities or regulators.

Separately, the CMA is also consulting on changes to the “de minimis” exception. This exception allows the CMA to deprioritise merger investigations which do not merit the cost of a formal investigation. Under the proposed reforms, the CMA may deprioritise mergers where the total value of the market concerned is less than £30 million ($37.5 million) measured in terms of revenue, up from £15 million.

It remains to be seen how impactful the lifting of the threshold will be. The draft guidance on the exception notes that the CMA will consider several factors when deciding whether to exercise its discretion. This includes questioning whether revenue is an appropriate metric to measure market size (for example, in digital markets with nascent technologies) or whether a merger taking place in a local market may be replicable at a national level (for example, in markets such as petrol stations, veterinary services or dentistry practices, all of which have attracted scrutiny from the CMA in recent years).

NO MAJOR CHANGES TO DISCLOSURES OF THIRD-PARTY EVIDENCE

Despite calls from a large number of respondents to the Call for Information, the CMA held firm on deciding not to introduce an “access-to-file” procedure which would have seen external advisers being granted access to all of the evidence gathered by the CMA, including that submitted by third parties.

The CMA considered the representations and concluded that there was no element of systemic unfairness in the current process which has been given a “clean bill of health” by the CAT. The CMA is also concerned with preserving incentives for third parties to cooperate with it fully.

There will be some minor tweaks around the edges, however, including allowing external advisors (and relevant individuals within a business, where necessary) access to full, confidential versions of CMA documents and quantitative data within a confidentiality ring at an earlier stage.

NEXT STEPS

Both consultations will run until 8 January 2024, and final guidance can be expected by the first quarter of 2024.

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